The 63-year-old had held talks with the club's Thai owners on Monday after Saturday's 3-0 home defeat to Millwall left them 13th in the table, albeit only two points outside the play-off places.
However, the Thailand-based owners Asia Football Investments are unhappy that after spending £10 million $16 million) on new players during the close season – a sizeable amount by Championship standards -- the results have not been better.
"Leicester City Football Club has confirmed today that, by mutual agreement, Sven-Göran Eriksson has ceased to be the first team manager, with immediate effect," read the club statement.
"First team coach Derek Fazackerley has also left the club.
"The club and its board of directors would like to thank Sven and Derek for the contribution they have made to Leicester City during their 13 months at King Power Stadium.
"Academy director Jon Rudkin and coach Mike Stowell will jointly assume the role of acting manager of the first team, with assistance from development coach Steve Beaglehole," the statement added.
"This will begin with training on Tuesday morning ahead of Saturday's Npower Championship trip to West Ham United.
"The process of recruiting a new permanent manager will begin in the coming days.
"There will be no further comments from the club or any comment on the recruitment process until an appointment is made."
The name of Martin O'Neill will be high on the list of possible replacements according to reports.
The Northern Irishman, who has not been involved in football management since leaving Aston Villa in August last year, had a highly successful spell at the club from 1995-2000.
Eriksson only signed a two-year contract in October last year after unsuccessful spells, since leaving the England job, with amongst others Mexico and at Notts County -- then in League Two -- whose owners failed to deliver the millions they had promised him to pay for new players.
Leicester were struggling in the relegation places when the Swede, who had been in charge of the Ivory Coast during the World Cup finals where they failed to reach the second round, replaced Paulo Sousa as manager.
Having guided them to safety and an eventual 10th spot in the Championship his side were heavily tipped to dominate the race for promotion to the Premier League this term but only five wins in 13 matches was enough to persuade the owners to dispense with his services.
Eriksson is the second former England manager to leave a Championship club this season, following his former assistant at national level and successor as coach Steve McClaren's sacking by Nottingham Forest.